Sunday, October 27, 2013

Republicans and Democrats have finally reached a tentative agreement to postpone the deadline for negotiating the US debt ceiling to early next year. But I believe that President Obama will not budge from his position on the matter because the Republicans’ popularity had been slipping over the course of the negotiations thus far.

Obama said that if the Republicans fail to approve the increase in debt limit, the US will have to default on its national debts for the first time since its founding. This would seriously affect the credibility of the greenback and would deter investors from buying US Treasuries from now on. The Republicans countered that the President cannot use the situation as a pretext to spend money freely, and Congress must put a stop to this. In the current agreement reached between both parties, it was, in effect, the Republicans who had relented. Since Obama took a non-negotiating stance, the Republicans had to extend the deadline by a few months every time negotiations were at a dead lock. Before long, probably in December, I believe the market will go into another round of turbulence over the US debt ceiling debate early next year. For speculators, that would mean another opportunity to ride the waves.

With the temporary settlement of the US debt ceiling issue, US stocks regained lost grounds as the Standard & Poor’s 500 Index hit a record high, while the Dow Jones Industrial Average is well on its way to another record level. After the partial shut-down of the federal government, many people are of the view that the Fed will not be tapering anytime soon, and are expecting it to announce that it is maintaining status quo at its meeting at the end of October.

In contrast to the buoyant mood in the US stock market, China’s GEM stock market experienced a mini crash that saw many GEM stocks plunging, triggering stop-sells and dragging the Shanghai Composite Index below the 2,200 mark. This mini stock market crash of GEM A-shares was triggered by a report from a major securities firm, which stated that GEM shares have been pushed to alarming price-earnings (PE) ratio levels by frenzied speculation. Investors and speculators were pulled up short by this report, and reacted by liquidating their positions en masse.

Currently, the GEM counters in China’s stock market are indeed hotly traded at very high PE. However, since shares on the main board are still relatively cheap, I am not too worried about a general collapse of the Chinese stock market. After all, the number of punters and the amount invested in the GEM counters are limited. Would you dare to put your entire worth on third- or even fourth-tier shares that could appreciate drastically by 50 percent within a day? Those who dabble in playing up the GEM stock market are shrewd, battle-hardened speculators, so there is not much to worry for them.

The situation is somewhat similar in Singapore and Hong Kong, with the Straits Times Index and the Hang Seng Index facing heavy pressure while second-, third- or even fourth-tier stocks were hotly traded. Interestingly, there are a couple of hotly-traded shares in Hong Kong that are familiar favorites for cyclical speculation. Every so often, punters would jump on them for a while before dumping them. After lying low for one or two years, they would start drawing attention again, and the cycle would repeat unfailingly. Why is this so? I believe it is because every wave of punting sees players who were winners in the previous wave playing up these counters. There is another group of seasoned investors who are die-hard supporters of these shares. They are good at timing their entrances and exits. And there are the rookie small investors who are blinded by greed and threw caution to the wind. Even if they know the risks, they are not afraid to take them, because they believe they would not be so unlucky to become the one left without a chair when the music stops. They believe that someone would surely offer a higher price for the shares that they bought high. Those who speculate on third- and fourth-tier stocks often subscribe to the theory of ‘stocks speculation over market speculation’. This is a dangerous doctrine, for if the market goes into a protracted reversal, precious few stocks will be able to buck the trend.

We are now pass the midway mark of October. The Third Plenum of the Chinese Communist Party will be held next month, and I believe the stock market would soon be pouncing on related stocks. This coming session of the Plenum will be the first long-term economic planning meeting that Xi Jinping and Li Keqiang are helming since they officially took over China’s political and economic power. This meeting is critical, for it sets the groundwork for planning for the next 10 years. Economic reform, household registration reform and land reform are expected to take centre stage. These issues have been brought up again and again in the past, but their time had not yet come. All eyes are now on Xi Jinping to push through these reforms. Since the realisation of the Chinese dream hinges on the success of these reforms, I am optimistic about the outcome.

There is no doubt that China can meet its 7 percent economic growth target this year. Its GDP grew by 7.8 percent over the third quarter, which is considered higher than expectations. I am more concerned about the People’s Bank of China’s mantra of ‘America advances, China backs off; America retreats, China advances’. Over the past five years, it is obvious that the People’s Bank of China’s policy is dancing tango with the US Federal Reserve. When US introduced quantitative easing, China began to taper; when US prepared to taper, China responded by easing monetary policies. If the US delays its tapering exercise further, I fear the People’s Bank will change its monetary easing policy very soon.

During his visit to Thailand, Chinese Premier Li Keqiang proposed to sell Chinese-made high-speed rail system to the Thai government, which will help boost China’s high-speed rail exports. However, for diplomatic reasons, China’s high-speed rail exports may not be profitable, as they could be priced at a ‘friendship price’. This is a factor to be mindful of when one is speculating on high speed rail stocks; many, many years ago, China went to build railways for Africa without charging a single cent.

A few days ago, I noticed a stock listed in May this year – Sinopec Engineering. It is a spin-off of Sinopec. When it was listed in May, it was priced rather low due to poor market sentiments. At HK$10.50, it was modestly priced, but it went on to fall below this offer price when trading started. It was not until 17 October before it climbed above its offer price for the first time. Having recovered from the lacklustre initial public offering, the counter looks primed for higher grounds.

I would also recommend you to add Chinese-funded health care stocks to your portfolio. I am not recommending any single stock, because I believe that the current stock market frenzy is across the entire industry sector. Recently, Fosun Pharmaceutical proposed to sell the intellectual property of two drugs to a Swiss company at a staggering €385 million. This has made the world sit up and notice that Chinese medicine research has reached international advanced levels, and they are now exporting intellectual property rights. Fosun Pharmaceutical shares leaped an impressive 13 percent the day the news broke, which in turn led to a 7 percent rise in Fosun International shares.

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